Money Funds Have Most Withdrawals This Year Amid Debt Talks

Investors last week pulled more money from money-market mutual funds than any week this year as U.S. lawmakers failed to resolve the impasse over raising the debt ceiling.

Withdrawals reached $37.5 billion, with about 70 percent of the redemptions coming from institutional funds that invest in U.S. government securities, according to data from the Investment Company Institute, a Washington-based trade group. Investors poured $3 billion into German stock funds in the week ended July 27, the most since mid-2008, and $1 billion into gold and precious-metals funds, according to EPFR Global, a Cambridge, Massachusetts-based research firm.

“This is a unique situation and people are afraid of the unknown,” said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts-based firm that tracks the $2.6 trillion money-market fund industry. Crane said that last week’s money fund withdrawals, while higher than normal, didn’t indicate panic on the part of investors.

The House of Representatives last night put off a vote on Speaker John Boehner’s plan to raise the $14.3 trillion debt ceiling after the Republican lawmaker failed to win enough support from his own party. The stalemate in Washington has exposed money-market clients to increased danger, including the potential for a missed interest or principal payment on government bonds as well as “incremental weakening” of overall credit quality for portfolios with U.S. government holdings, Moody’s Investors Service Inc. said earlier this week in a statement.

‘Safe Havens’

Moody’s placed the AAA rating of U.S. debt on review for possible downgrade as the Aug. 2 deadline for raising the ceiling approaches.

The credit watch has sent investors to perceived “safe havens” outside the U.S., according to EPFR. German stock funds tracked by the firm have attracted $15 billion in deposits this year, compared with $5.5 billion for U.S. equity funds, EPFR said.

Concerns about the safety of money-market funds have been overstated, said Brian Reid, the ICI’s chief economist. Low interest rates and lingering concerns about Europe’s debt problems could also be behind the withdrawals from money funds, Reid said.

“I don’t know of any scenario in which money-market funds would be disproportionately affected compared to other market participants by a failure to raise the ceiling,” Reid wrote in an article published yesterday on ICI’s website.

’Stress-Tested’ Funds

Last week’s redemptions were the largest since the week ended Dec. 15, 2010, when investors pulled $37.7 billion from the funds, according to the ICI.

Fidelity Investments, the biggest manager of money funds, wrote in a commentary to clients yesterday that the firm has taken steps to ensure the safety of its funds even in the event of a “severe disruption” in the markets.

“We have stress-tested our money-market mutual funds, and we believe they can withstand significant market volatility -- far more than the historical largest one-day move in three-month bills that occurred in the last 40 years,” Tim Huyck, who manages money-market portfolios at Boston-based Fidelity, wrote in the commentary.

The firm’s funds exceed their daily and weekly liquidity requirements -- 10 percent and 30 percent, respectively -- and have shorter weighted average maturities, Huyck wrote. Money funds are required to keep a portion of their assets in securities that can readily be converted to cash.

Fidelity’s funds won’t be forced to sell securities if the U.S. is downgraded from AAA to AA, the firm said.

‘Extremely Remote’ Risks

U.S. money-market funds held about $760 billion in Treasuries, government-agency debt and repurchase agreements in April, according to New York-based JPMorgan Chase & Co.

David Glocke, who oversees $163 billion in money-fund assets at Valley Forge, Pennsylvania-based Vanguard Group Inc., said his firm has seen no evidence of withdrawals among the retail customers it serves.

Data from the ICI show virtually all the withdrawals last week were made by institutional investors.

“We don’t expect the U.S. will default on its obligations,” Glocke said in a telephone interview today. He called the risk of default “extremely remote.”

Investors last week pulled more money from money-market mutual funds than any week this year as U.S. lawmakers failed to resolve the impasse over raising the debt ceiling.
Withdrawals reached $37.5 billion, with about 70 percent of the redemptions coming from institutional...